TTIP Update XLVI

Not much has been happening on the TTIP front during the holiday break, but there's one extremely important report that came out a little earlier that I'd like to explore in this update. It's called "The hidden cost of EU trade deals: Investor-state dispute settlement cases taken against EU member states", and has been put together by Friends of the Earth Europe. As that title makes clear, it's about an aspect of the ISDS mechanism that has so far been overlooked: the fact that the EU has *already* suffered as a result of the inclusion of ISDS in other agreements. As such, they give a foretaste of what's likely to happen if ISDS is included in TTIP (and CETA):

Glyn Moody
January 2, 2015

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Not much has been happening on the TTIP front during the holiday break, but there's one extremely important report that came out a little earlier that I'd like to explore in this update. It's called "The hidden cost of EU trade deals: Investor-state dispute settlement cases taken against EU member states", and has been put together by Friends of the Earth Europe. As that title makes clear, it's about an aspect of the ISDS mechanism that has so far been overlooked: the fact that the EU has *already* suffered as a result of the inclusion of ISDS in other agreements. As such, they give a foretaste of what's likely to happen if ISDS is included in TTIP (and CETA):

One of the European Commission’s arguments supporting the inclusion of the mechanism in those trade deals is that EU member states have already signed thousands of trade and investment agreements, which include such investor-state dispute arbitration. Investor-state arbitration has become a consistent feature bilateral investment treaties (BITs), with EU member states being party to some 1,400 BITs including ISDS since the late 1960s. So the European Commission says it should be part of the agreements now under negotiation.

What the European Commission rarely mentions is how often this mechanism has been used against EU member states, and how much this mechanism has cost EU taxpayers. The ongoing negotiations of trade and investment agreements – including the Transatlantic Trade and Investment Partnership, the Transpacific Partnership, and negotiations between the EU and the US respectively with China – are unprecedented in size and scope, and would drastically expand the extent of foreign direct investments covered by investor-state arbitration. Such an expansion would risk seriously undermining governments’ ability to regulate for the protection of people and the environment.

Here are the report's key findings:

127 known ISDS cases have been brought against 20 EU member states since 1994. Details of the compensation sought by foreign investors was publicly available for only 62 out of the 127 cases (48%). The compensation sought for in these 62 cases amounts to almost €30 billion.

Note that the €30 billion figure is almost certainly an under-estimate, since over half the cases remain shrouded in (typical) secrecy. The real figure for the claims is likely to exceed €50 billion.

The total amount awarded to foreign investors – inclusive of known interest, arbitration fees, and other expenses and fees, as well as the only known settlement payment made by an EU member state – was publicly available for 14 out of the 127 cases (11%) and amounts to €3.5 billion.

Again, that probably under-estimates the real cost to EU nations.

The largest known amount to be awarded by a tribunal against an EU member state was €553 million in the Ceskoslovenska Obchodni Banka vs. Slovak Republic case (1997).

The report is valuable not just for bringing all these figures together for the first time, but for providing details of several of the most significant cases. They're all well-worth reading, since they flesh out the otherwise rather dry ISDS concept. I'd like to focus on one, which raises some particularly important issues. Here's the report's summary of the case:

The Micula brothers invested in the North West region of Romania – setting up multiple food processing, milling and manufacturing businesses. In 2005, the claimants initiated a dispute against Romania seeking compensation to the tune of €450 million. The case emerged following a series of decisions taken by Romania, which altered or withdrew a number of investment incentives (ie: exemptions from custom duties and certain taxes) that had previously been offered to the Micula brothers in support of their investment in a disadvantaged region of Romania. Romania argued that the regulatory changes they made were warranted, as they were implemented as part of the lead up to accession to the EU in 2007. In December 2013 the tribunal found Romania in breach of the Sweden-Romania BIT and obliged to pay more than $250 million (€183,311,335) in damages.

Clearly, $250 million is a lot of money for a government like Romania to find, money that will have to be taken from other areas of the country's budget - perhaps things like health provision and education. That's bad enough, but what's really problematic here is that Romania withdrew the investment incentives involved in the case because the European Commission required it as a condition of Romania's accession to the European Union:

The Micula vs. Romania case has incited a great deal of interest, particularly in relation to the sovereignty of EU law. The European Commission (EC) intervened and attempted to convince the tribunal that the actions implemented by Romania were taken in an effort to comply with EU law obligations to eliminate state aid (ie: subsidies and incentives). The Commission argued that if the tribunal ordered Romania to pay compensation it would be considered state aid under a different pretense. The arbitrators were not swayed by the EC’s interventions and, in relation to the enforceability of the final award, drew "attention to Romania’s obligations under the ICSID Convention to comply with the final ICSID awards."

Put simply, what that means is that the tribunal ruled that when it came to protecting investments, EU law should be ignored - a real slap in the face for the European Commission, which had made a direct intervention to avoid just such an outcome.

This is the key problem with ISDS: it places the rights of corporations above the rights of nations - indeed, in this case, above the rights of the EU to determine laws within its borders. ISDS cannot be "fixed", as the European Commission would have us believe, because it was designed with exactly this purpose in mind: it was introduced as a way of protecting investments in countries where the local rule of law could not be depended upon. Since that is manifestly not the case in the EU or US, it serves no purpose other than to undermine the strong legal systems there. The only solution is therefore to drop ISDS from TTIP, CETA and all future agreements.